Learn To Sell The Weak Rebound From 10-Week Average

By now you know how to buy a stock on a rebound from its 50-day or 10-week moving average. Today we'll look at the rebound as a chance to sell.

Almost certainly we aren't talking about the same kind of rebound. The buyable bounce is attractive: Volume is soft on the way down and then picks up as the stock makes its launch from the 50-day line. If you're an experienced trader, you've likely caught some good stocks that way. But if the stock fell to the 50-day line with heavy volume, you may be looking at a problem.

If that same stock then bounces off the 50-day line, you may feel better about it — until you notice that volume on the way up is a shadow of that seen on the way down. A high-volume decline to or below the 50-day moving average followed by a weak low-volume rise is your chance to sell.

Now let's make it more interesting. You already own this stock and have a fat gain in the position. Your miracle stock makes a peak and beats a hasty retreat. No problem, you say to yourself, your entry is well protected.

But this retreat is disconcerting: It includes some of the heaviest volume of the entire run. Uh oh. The next thing you know it's hitting the 50-day line. It bounces. You feel better. And then you see the bounce has low volume.

Look at what happened to China Mobile (CHL) in 2007-08. China's biggest wireless provider had been on a tear for several years, a familiar name on the then-IBD 100 during every uptrend.

After these massive gains, China Mobile put in what would become its ultimate top on Oct. 29, 2007. That new high appears with low volume 1, your first sign of worry. The ensuing decline to pierce the 50-day line shows heavy volume 2.

China Mobile regains the 50-day Nov. 28, but volume is a shadow of that seen during the sell-off 3.

The stock begins to slide again, this time with no big volume like before. Yet the action is now becoming choppy, a bad sign. Maybe you're lulled by the quiet volume as it dips. Maybe you're waiting for another base to form.

But the offense-type sell signals had already appeared: A huge, long-term advance, a climax top in October, low-volume new highs and a high-volume sell-off. Finally, another early sell opportunity appeared between Nov. 23 and Dec. 6, as China Mobile rebounded from its 50-day line in thin trade. By October 2008, it fell 67% from its 104 peak.

By now you know how to buy a stock on a rebound from its 50-day or 10-week moving average. Today we'll look at the rebound as a chance to sell.

Almost certainly we aren't talking about the same kind of rebound. The buyable bounce is attractive: Volume is soft on the way down and then picks up as the stock makes its launch from the 50-day line. If you're an experienced trader, you've likely caught some good stocks that way. But if the stock fell to the 50-day line with heavy volume, you may be looking at a problem.

If that same stock then bounces off the 50-day line, you may feel better about it — until you notice that volume on the way up is a shadow of that seen on the way down. A high-volume decline to or below the 50-day moving average followed by a weak low-volume rise is your chance to sell.

Now let's make it more interesting. You already own this stock and have a fat gain in the position. Your miracle stock makes a peak and beats a hasty retreat. No problem, you say to yourself, your entry is well protected.

But this retreat is disconcerting: It includes some of the heaviest volume of the entire run. Uh oh. The next thing you know it's hitting the 50-day line. It bounces. You feel better. And then you see the bounce has low volume.

Look at what happened to China Mobile (CHL) in 2007-08. China's biggest wireless provider had been on a tear for several years, a familiar name on the then-IBD 100 during every uptrend.

After these massive gains, China Mobile put in what would become its ultimate top on Oct. 29, 2007. That new high appears with low volume 1, your first sign of worry. The ensuing decline to pierce the 50-day line shows heavy volume 2.

China Mobile regains the 50-day Nov. 28, but volume is a shadow of that seen during the sell-off 3.

The stock begins to slide again, this time with no big volume like before. Yet the action is now becoming choppy, a bad sign. Maybe you're lulled by the quiet volume as it dips. Maybe you're waiting for another base to form.

But the offense-type sell signals had already appeared: A huge, long-term advance, a climax top in October, low-volume new highs and a high-volume sell-off. Finally, another early sell opportunity appeared between Nov. 23 and Dec. 6, as China Mobile rebounded from its 50-day line in thin trade. By October 2008, it fell 67% from its 104 peak.

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11/04/2014 03:15 PM ET

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